For 30 days starting Monday, short-selling will be restricted on 19 financial companies. Financial regulators are also cracking down on "sensational rumors." To put the short-selling rule in perspective, consider that even when the market re-opened after the September 11th attacks, the SEC considered, but didn't implement, short sale restrictions.
Since Bear Steans collapsed and Vanity Fair bought the company's story that short-sellers did them in, everyone is worried that short sellers are bringing the market down. And I'm sure they are, but short-selling, after all, is legal. The SEC just loosened rules on it last year.
Yesterday, SEC chair Steven Cox testified that he's worried about short-selling in connection with spreading false rumors to manipulate the market. OK, that's not legal, but as Cox pointed out, the SEC brought its first case -- EVER -- for this sort of deception this year. And it still hasn't gone after anyone for spreading false positive rumors about a company.
The one case the SEC prosecuted was against trader Paul Berliner, who spread the rumor that the Blackstone Group (NYSE: BX) was going to lower the price it was offering to buy Alliance Data Systems (NYSE: ADS). The SEC isn't necessarily improving its detective work, Berliner was just not smart enough to avoid using text messaging to spread the rumor.
The SEC has also issued subpoenas for 50 investment banks and hedge funds. It is going after smart traders like SAC Capital and Citadel. It is looking for evidence somebody went after Bear Sterns or Lehman Brothers (NYSE: LEH). I'm not sure what evidence the SEC is looking for, but I would be amazed if it came up with anything as tangible as a deliberate false rumor on an email or text message. Again, I don't doubt that some of these firms are profiting from the financial sector collapse, but I do doubt that even if they manipulated the market they didn't leave an email trail.
But if you're a trader at a hedge fund who has just gotten a subpoena, how do you react when you hear something negative now? Do you pass the information along? Trade on it now, or wait till the 30 days are up? The new rules and subpoena may give you pause.
I see all these SEC moves as a way to slow down negative sentiment on financial stocks more than an attempt to curb manipulation. If there are manipulators, I hope the SEC catches them. I'm sure there are some (legal) shorts bringing down some financials, but that's the free market. The argument in favor of shorts is they give investors a way to make money off negative opinions. If those players are held back from just these stocks for one month, it stands to reason these stocks will be artificially high.
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Reader Comments (Page 1 of 1)
7-16-2008 @ 6:23PM
Anon said...
Short selling is legal, but naked short selling is illegal. There are rumors that people have been shorting stocks with no intention of deliverying.
Secondly, there is a reason the uptick rule was created after the great depression. A few major economicists (also I think Cramer said on his show) are begging the SEC to put the rule back into place.
There is nothing wrong with Short Selling but without the 70 year old uptick rule, we might see naked shorting ruin companies that are not overvalued and then run rumor scams like hiring actors to sit out front of a bank to make it seem like a run was about to happen.
7-16-2008 @ 7:14PM
william lindblad said...
I already have placed one post regarding this but,--
In the case of those playing Jay Gould athe government should first look in their own backyard.
Last Friday the early word on the the Street was that both the two F's might be in some kind of liquidity trouble. The stocks started to sink, taking the whole market with them. Enter Bernanke with a "hint" that the Fed would open the discount window to these entities, if necessary. Market gets over jitters. Over the W/end the brains in Washington put their respective heads together, Bernake denys that the Fed is going to do anything (he really was not empowered to do it) and Paulson steps in the void with the supposed bag of taxpayer cash. Paulson, with Bush's backing, can get away with this - albeit on a temporary basis until Congress makes up their mind on a yes or no. Result is Monday's government prime time soap opera with everyone who is anyone on TV - all at the same time. This gets a lot of media and market investor attention and the SEC's Cox pulls the short moratorium hat trick. Congress who really pulls all the strings go right back to partisan argument. Bernanke states that inflation is not to worried over and the oil traders take note of Cox's position which is somewhat mirrored by a present Senate bill.
Oh, and of course they had the unexpected in IndyMac.
They need a magic act to keep the economic illusion in place - and it almost worked. Bernanke should have hinted at a possible 1/4 point increase. It would not effect the credit crisis on way or another as all the lenders are running scared, but it would have been a great dramatic play for investor confidence. As it stands oil came down, the financials look a little better, but the dollar/euro didn't budge.
That and getting the beaten up consumer to buy into "good times are here again" is going to prove a little more difficult.
Going back to "rumor". Little doubt that oil came down, but I think this is temporary and I picked Thursday for it's return. The most common explanation for it coming down has been that the economy looks weak, along with adequate supply and the price is too high and causing the economic weakness. To paraphrase Arthur C. Clark. "the truth is what is commonly believed by the masses".
Other possibilites include a "wait and see" on Cox's position to which the option end is already seeking exemption and the decrease could also be selling by pressed contract holders to raise cash. Should prove interesting as Cox really does not have a leg to stand on. There is no war, national emergency and the execs of the two F's say that both entities are in fine financial shape.
7-17-2008 @ 9:57AM
Connie said...
Maybe they should enforce the rules already out there!!! Guess that would be a no brainer! Of course, they probably never read the rules in the first place!
7-19-2008 @ 7:37PM
Babak said...
In my recent blog post [ http://babaksjournal.blogspot.com/2008/07/more-efficient-shorting-tactic.html ], I propose a hopefully more efficient tactic for shorting involving setting up a net hedged position in 2 separate brokerage accounts. The tactic is designed to mitigate the regulatory hurdles that make it difficult to time the short sale of a hard-to-borrow stock.
Short sellers might find the idea useful.
7-21-2008 @ 1:17AM
james said...
Short selling puts a double wammy on shares. Naked short selling is unethical. Its like telling your loan officer you have a net worth 20 times more than what it actually is and its like your loan officer giving you a loan when you don't qualify. Just look what that has done to the banking industry. Wise up!